By James BargentSince the arrival of Dell and Sykes BPO operations in 2004-05, El Salvador has witnessed the type of rapid expansion in the outsourcing sector that makes nearshore investors sit up and take notice. Starting from a base of a handful of specialized operations, the sector now employs approximately 12,500 people in over 45 BPO companies, a list that includes industry heavyweights Teleperformance, Atento and Stream.

Last week, Nearshore Americas spoke to the El Salvadorian Vice-Minister for the Economy, Mario Roger Hernandez, about what the country has to offer as a nearshore destination and what the government is doing to ensure the outsourcing sector continues its impressive growth.

El Salvador’s success up to now has been based on a value proposition located somewhere between the basement costs of emerging markets like Nicaragua and Honduras, and the more developed infrastructure and labor pools of established markets such as Mexico and Costa Rica. According to Hernandez, at the core of this value proposition is a stable business climate. “El Salvador is well recognized for its excellent investment environment in terms of regulation, institutions, democracy and macro-economic stability,” he said. To this base, Hernandez added high quality telecommunications and transport infrastructure and a strong service industry – which already makes up 60% of El Salvador’s GDP – as reasons to invest in Salvadorian BPO.

Centrist and Pro-Business

The vice-minister also went to lengths to stress that investors in El Salvador will be aided by a business-friendly government – a claim that is no longer met with the suspicion it aroused when President Mauricio Funes assumed power in 2009. Funes is the first president elected from the Farabundo Martí National Liberation Front (FMLN) – a former leftist guerilla insurgency that became a political party in 1992 as part of the peace process that ended El Salvador’s 12-year civil war. His election sparked fears among some business leaders that he would initiate a pro-labor, pro-union, anti-business agenda.

The fears proved unfounded and instead Funes has looked to court the business community and international investors. “It was an important concern of the business community whether this change from a right-wing to a left-wing party would bring any changes” said Hernandez, “[so] from the very first day the president sent very strong messages to the community to maintain their confidence in El Salvador.”

The political situation though, could still change in the mid-term future. Funes’ centrist pro-business policies have alienated many supporters from the left of the FMLN and analysts believe there are likely to be clashes over whether the candidate for the 2014 elections is another Funes-style moderate or a more traditional FMLN militant. Despite this looming confrontation, Hernandez insists investors can be confident their money is safe and will remain so. To reassure investors of the stability of the business environment, the government recently sent out information about its new reform – the Project Stability Framework – which commits the government to the investment and regulatory framework established by the reform for the next ten years, according to Hernandez.

“For companies that are located in BPO services, language skills are not an issue,” he said. “They are not having a hard time finding people that have learned the language.”

With two years left of its term, the Funes government remains committed to attracting foreign investment, especially in nearshoring, and the BPO industry is part of the nine strategic sectors identified as a priority by the government. According to Hernandez, this decision was taken “because of [the sector’s] impact in terms of employment but also in the capacity of the sector to develop very fast results in the short term.”

Until now, most of those jobs have been generated in call centers, and contact work dominates the sector. However, the country is looking to move up the value chain and the first step will be expansion in the business process services offered. “One of the strategies of El Salvador is to generate the conditions to offer companies the platform to expand these services to cross-industry BPO services and also to the industry specific services like credit services, health administration, industry specific BPO, insurance BPO and utility BPO,” Hernandez said.

Critical Training and Education

According to Hernandez, the government is also investing in training and education programs related to the tech sector and has its eye on targeting ITO investment. “The analytical industries – science, innovation and development of technology are a very important part of the strategy for investment,” he said.

El Salvador’s rapid BPO expansion owes much to its wealth of English speakers, boosted in recent years by migrants returning from the United States, where over a quarter of El Salvadorians live. The bilingual labor pool has also been aided by training programs such as “Access to Employment,” a joint project between El Salvador and USAID that includes intensive English training for 5,000 students and workers.

However, Hernandez admitted that El Salvador’s depth of bilingual talent is despite, not because of the public education system and that the English skills of El Salvadorians leaving state schools were “not good.” According to the vice-minister, that skill-gap is filled by the private education sector with its strong emphasis on languages and raft of bilingual schools. “For companies that are located in BPO services, language skills are not an issue,” he said. “They are not having a hard time finding people that have learned the language.”

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Yet, with a population of just over 6 million and an economically active population of just 2.8 million people, a reliance on private education may fuel existing fears over scalability and workforce saturation, especially as it appears calls from within the BPO sector for a sustainable growth strategy have gone unheeded. According to Hernandez, scalability is not currently something the government is concerned about or acting on. “It’s relative,” he said. “We have a very large supply to offer in El Salvador and there is no prospective or forecast of having a shortage in terms of the supply side.”

The point at which El Salvador reaches workforce saturation could also depend on the industry’s ability to penetrate outside of the San Salvador metropolitan area, where it is currently concentrated. According to Hernandez, the government is planning to encourage this expansion by developing a sliding scale incentives package that increases incentives for companies willing to set up in areas where an economic stimulus is more needed.

The Funes government has also had to contend with wider economic and social issues in its bid to promote a strong investment climate. According to Hernandez, macro-economic stability is “fundamental” to El Salvador’s value proposition. However, the government’s ability to maintain that stability was recently thrown into doubt by the April resignation of previous Minister of Economy Hector Dada, who cited differences with President Funes over the economic direction of the country. Last year public spending and debt soared while the growth rate of 1.5% was lower than expected, and just before Dada’s resignation the IMF suspended a $750 million loan after the government failed to meet its 2011 public spending commitments.

Hernandez insisted El Salvador remains on a stable economic path and denied that the resignation was an indication of divisions. “It has some internal reasons,” he said, “but it doesn’t affect the normal behavior of this ministry or the commitment of the government to the investment climate.”

Security: Not an Obstacle

Another concern for potential investors has been security issues. El Salvador lies on a major drug transit route between Colombia and Mexico and has felt the aftershocks of the region’s worsening drug war. However, the country’s high crime rate and its murder rate, which has spiraled in recent years and is among the worst in the world, are mostly related to local gangs known as “maras.”

While acknowledging the problem, Hernandez denied it should be an obstacle to investment in the country. “In many cases investors are concerned about the situation,” he said. “…but when you talk to investors and the people behind the companies, they say of course there is an issue, but you go through that issue and you get to know the country and you get to know the people [then] you will find that there is another reality – that it is possible to do business in this country.”

According to Hernandez, the government’s attempts to tackle security problems are focused on causes as well as symptoms. “It is not a problem you solve with just force,” he said. “…there is also an economic issue – a lack of opportunities.”

For the center-left government of Funes, part of the solution to the lack of economic opportunities remains attracting foreign investment, a policy that generates significant space for the BPO industry. So far his government’s commitment to the sector has helped it continue its impressive growth, and according to Hernandez, by the time Funes’ term ends in 2014 there should be in place a stable investment framework that will overshadow any lingering doubts over stability and security. However, as the smallest country in the region, El Salvador may struggle to punch above its weight unless long-term steps are taken to address scalability issues.